Flexibility markets for the grid edge are used to solve some of the electricity system’s most pressing challenges. They help manage network constraints, reduce renewable curtailment, and give distributed energy resources (DERs) a route to provide valuable grid services.
These markets deal in explicit flexibility: flexibility that can be bought, sold, and dispatched when it’s needed. Today, utilities and distribution system operators (DSOs) are among the most established buyers.
What happens when we widen that pool?
The many use cases for flexibility
A flexibility market connects a buyer that values a flexible action with an asset capable of providing it.
A traditional use case is that DSOs procure flexibility from DERs when and where capacity is constrained via a market, as an alternative or complement to traditional reinforcement. DERs capable of making that change can earn revenue by providing it – EVs that move their charging times, for example.
The opportunity is to understand where DERs can provide reliable, cost-effective grid value, and where traditional investment remains the better option. That use case remains one of the most valuable things flexibility does, and DSOs will continue to rely on it.
Yet assets can do more than support in instances of network constraints. Network needs tend to be concentrated in specific places and at specific times, so the same assets often have capacity to spare for much of the year.
A battery, for example, can charge or discharge electricity at different times. Different parties can value that capability for different reasons. One of the biggest opportunities for DERs is creating more routes to market for what those assets can already do.
And that means asking the question of “who else values flexibility?”
A buyer managing portfolio risk
Our recent work with tem provides one example.
tem connects businesses with renewable generators through its energy transaction infrastructure. Like anyone managing an energy portfolio, it has to contend with the reality that forecasts are rarely perfect.
You can plan how much electricity you expect to have and how much you’ll need, but the two can differ. When they do, someone has to close the gap.
Sometimes that gap is sudden and severe e.g. a generator goes offline unexpectedly, just as prices spike. These sudden volume imbalances or portfolio shortfalls are rare and hard to predict, but when they happen, the shortfall cost can be significant.
The wholesale market offers one way to close it. However, buying electricity at short notice can expose an organisation to volatile prices.
Organisations in this position can also hedge through exchanges or financial counterparties, but those counterparties price in their own opportunity cost as traders.
A structurally different cost base
DERs offer an alternative.
For the grid, DERs are predominantly secondary use. Someone buying an EV is buying a car so they can get to work more cost-effectively, and heat pumps are bought for affordable heating in the home. i.e. They’re not bought specifically to support the grid. That demand-led transition is meaning DERs are deployed faster than the grid needs them.
So their opportunity cost is very different to a trader, whose primary use is trading in this market and dealing with its volatility.
A trader is exposed to the market and knows what it costs to be out of it. An EV owner is in a different position. The car is already transporting consumers to work, so any payment for providing flexibility is upside.
That doesn’t change once DERs are participating in markets. They don’t become just another financial option or derivative, because customers are still buying them, and paying for them, for other reasons. For as long as that’s true, this will be an enduring feature of the system.
The challenge is that there’s a long tail of very different DERs – different shapes, sizes, uses, and customer types – and a small number of buyers. On their own, most owners don’t have an easy way to provide their flexibility without taking on too much cost or risk of delivering it, which is why we have aggregators today.
A buyer that wants 10 MW isn’t going to contract with a thousand different assets for a hedge or an insurance product. They need an easy transaction, ideally with a single counterparty.
That’s where a market can help to bridge the asymmetry between the supply side and the demand side, by standardising and structuring products.
tem saw the opportunity, starting with batteries.
How tem’s market works
Through market platform ElectronConnect, tem reserves battery capacity ahead of time and calls on it if its energy position diverges from what was forecast. To simplify, it’s a three-step process:
- Reserve: tem secures access to battery capacity in advance.
- Call: When a mismatch emerges, tem calls on that reserved capacity.
- Respond: The battery dispatches electricity to help close the gap.
tem issues signals a day ahead, so when its reserved capacity isn’t needed, batteries can keep participating in other markets.
For battery operators, the arrangement adds another route to market alongside the ones they already use.
As tem CEO Joe McDonald explained in a recent Modo podcast episode, batteries can give up some exposure to periods of volatility in return for an availability fee and greater price certainty over a longer period. If they’re dispatched, they’re paid for that too.
Joe describes the role batteries can play here as “physical insurance” against short-term exposure.
It isn’t “insurance” in the conventional sense, but it’s a pretty good analogy for reserving physical capacity in advance and calling on it if a short-term mismatch emerges.
More buyers of flexibility
The question is therefore moving from “What flexibility does the grid need?” to “Who else values a flexible action, and what are they willing to pay for it?”
That could mean an energy company managing its portfolio day to day – calling on DERs to turn demand or generation up or down as its position shifts – or a renewable generator looking for another way to manage periods of excess generation. It could mean a large energy user with a specific operational need.
The tem market is one example of a new buyer. We think there are more. Finding those opportunities means identifying:
- Who has a problem that a flexible action could solve?
- Which assets can provide that action?
- What value does that action have for both sides?
- And what market structure allows them to transact efficiently?
Obviously not every use case warrants its own flexibility market, but the point is that a buyer of flexibility does not always have to be a DSO.
None of this takes anything away from DSO markets. Most DERs are connected at the distribution level, so any new market must respect the limits of the network they sit on.
That makes coordination between markets essential, and DSOs and distribution utilities remain critical partners.
There’s another signal here too. When organisations carrying real market risk are willing to rely on DERs to manage it, that says a lot about how dependable these assets have become. Each time those assets are called on and respond, the evidence around how they perform grows.
A wider market for sellers of flexibility
DER owners benefit from this shift in how we think about flex too. For them, the grid is a secondary use as we’ve established, so the challenge is creating routes to market that let them monetise that capability without preventing them from participating elsewhere.
Some of these new routes can also be simpler to access. A market like tem’s is non-locational, so it doesn’t matter where on the network an asset is connected. Settlement can take different forms too: physical, where the energy is transferred to the buyer’s account, or financial, where buyer and seller settle the difference against an agreed price.
When more organisations can express the value that flexibility offers them, they create more potential routes to market for flexible assets. Those additional avenues can, in turn, help DER owners build richer revenue stacks.
Building new flexibility market use cases with ElectronConnect
ElectronConnect is our flexibility marketplace for the grid edge. It connects organisations that value flexibility with the DERs able to provide it, wherever it makes technical and economic sense, and supports everything from onboarding and procurement to dispatch, measurement, verification, and settlement.
Our work with tem shows how that same infrastructure can support a different kind of flexibility market built around managing energy positions rather than a network constraint.
We’ve spent a lot of time asking what value flexibility brings to the grid. Now we can start asking who else values it, and how markets can connect them. As long as DERs keep being bought for reasons beyond the grid, that opportunity will keep growing.
